Sears, Urban Outfitters Said to Weigh J. Crew Bids

By Jeffrey McCracken and Zachary Mider -
Jan 5, 2011

Sears Holdings Corp. and Urban
Outfitters Inc. are weighing rival bids for clothing retailer J.
Crew Group Inc. in a potential challenge to TPG Capital and
Leonard Green & Partners LP’s $3 billion buyout, said three
people with knowledge of the matter.

Sears and Urban Outfitters are studying J. Crew’s books,
said the people, who asked not to be identified because the
matter is private. Neither company has indicated whether it will
actually counter TPG and Leonard Green’s $43.50-per-share offer,
the people said.

Sears buying the clothing chain “would be great for Sears,
but horrible for J. Crew,” said Christine Chen, a San
Francisco-based analyst for Needham & Co. “J. Crew is
positioned as aspirational and Sears is not. It would have a
negative impact on the J. Crew brand.”

A J. Crew-Urban Outfitters tie-up would make less sense
because the two companies have overlapping customers and J.
Crew’s sales are growing more slowly, said Chen, who recommends
holding J. Crew shares and buying Urban Outfitters.

At least two other private-equity firms are also receiving
confidential data on the New York-based retailer, said the
people. J. Crew’s go-shop period, in which a public company
solicits competing offers, expires Jan. 15 so any bid must be
made before then. TPG and Leonard Green’s Nov. 23 offer for the
company was 29 percent higher than J. Crew’s average closing
share price in the month prior to the announcement.

Lawsuits

A rival offer may validate J. Crew’s strategy of depending
on the go-shop period to solicit competing bids, rather than
conducting an auction before signing the agreement with the
buyout firms. The company faces more than a dozen lawsuits from
shareholders questioning whether J. Crew Chief Executive Officer
Millard Drexler is getting a fair price for the acquisition.

J. Crew climbed 98 cents, or 2.3 percent, to $44.04 at 4:01
p.m. in New York Stock Exchange composite trading for the
largest since TPG and Leonard Green’s November bid. Sears
advanced 89 cents, or 1.3 percent, to $72.35 on the Nasdaq Stock
Market, while Urban Outfitters fell 14 cents to $35.75.

TPG previously owned J. Crew, and hired Drexler in 2003 to
run it. He plans to stay CEO if the buyout firm takes it private
again.

A spokeswoman for Urban Outfitters didn’t respond to a
request for comment. A spokeswoman for J. Crew and a spokesman
for Sears declined to comment.

Go-Shop Period

Under the agreement with the private-equity firms, J. Crew
must pay TPG and Leonard Green $27 million if it accepts a
higher offer. The fee, representing about 1 percent of the
purchase price, is lower than the typical fee. Sometimes rival
companies use a go-shop period to learn more about a competitor
and have no intention of bidding. Most go-shop periods don’t
result in a rival bid.

Sears, owner of the Sears and Kmart chains, has sought to
lure customers back to stores to reverse three straight years of
declining sales. Chairman and majority shareholder Edward Lampert faces mounting competition from discounting rivals such
as Costco Wholesale Corp. and Wal-Mart Stores Inc.

On Jan. 4, Sears named Lana Cain Krauter, formerly of
Bealls Department Stores Inc. and J.C. Penney Co., as president
of its apparel business. The company’s apparel brands include
Lands’ End, Jaclyn Smith and Joe Boxer.

Eight Brands

Urban Outfitters has a wholesale apparel division and
retail operations, whose lines include its namesake brand and
Anthropologie. Urban may grow to as many as eight brands within
10 years by acquisition or developing its own, CEO Glen Senk
said at an investor conference in November. The retailer has
made one acquisition in its history, buying J. Franklin Styer
Nurseries Inc. for $24.3 million in 2008 to expand into
gardening products.

Senk could make a marriage with J. Crew work because he
lets brands operate autonomously, said Edward Yruma, a New York-
based analyst for Keybanc Capital Markets who recommends holding
Urban shares.

“If any strategic would have a chance of making it work it
would be him,” Yruma said. “Historically, they’ve done things
organically and I’d be surprised if they did this.”

TPG’s offer for J. Crew was the largest in the retail
apparel industry last year, according to data compiled by
Bloomberg. The retailer has about 250 stores, which include the
J. Crew and Madewell clothing lines.

Retail Deals

Last year, there were 77 announced deals in the retail
apparel industry globally, according to data compiled by
Bloomberg. In the nine deals where data is available, bidders
paid a median of 9 times earnings before interest, taxes,
depreciation and amortization. TPG and Leonard Green’s proposed
offer for J. Crew implies a multiple of 8.1.

TPG and Leonard Green had negotiated the initial
transaction with the support of J. Crew CEO Drexler. At least
two other parties made overtures to J. Crew before the TPG
announcement, according to regulatory filings from Dec. 6
related to the offer.

Drexler waited more than a month after a Sept. 1 dinner
with TPG co-founder and J. Crew director James Coulter before
notifying the full board about Coulter’s takeover proposal,
according to the filing. He later told a committee of
independent directors charged with handling the negotiations
that he has a “high comfort level” with TPG and had
“significant reservations about the prospect of working for a
new boss,” according to the filing.

Coulter’s Role

Coulter has also been singled out in shareholder lawsuits.
He was aware of TPG’s interest in acquiring J. Crew and didn’t
tell fellow board members for several weeks, according to the
filing. Several days after informing Drexler of TPG’s interest,
Coulter’s assistant called to get board materials for him on
Sept. 10, the filing showed.

TPG’s ties to the retailer extend back more than a dozen
years, when the Fort Worth, Texas-based private-equity firm
acquired an 88 percent stake. Drexler took over in 2003, and the
retailer held an initial public offering three years later.